Rising unemployment is a major problem for the Government as it wrestles with economic restructuring in Hong Kong. Economists are divided over the importance of immigration in the worsening jobs market and the impact of the global economic downturn. The scale of what threatens to become a crisis for the administration was underlined last month when the unemployment rate jumped to a record 7.4 per cent, in the March to May period. The dramatic rise, from 7.1 per cent, prompted several economists to forecast a peak of 8 per cent by the end of the year, the jobless tally worsening as school leavers seek to join the workforce. There are now 253,000 people without a job and seeking work. The number of people in work fell 2.1 per cent in May. Under-employment also grew, to 3.1 per cent in March-May from 3 per cent in the three months to April. The jobless rate in last year's first quarter was 4.6 per cent, with new jobs growing at 3.2 per cent. Much of the worsening unemployment is being attributed to the global slowdown and its impact on Hong Kong's open, trade-dependent economy. The days of unemployment rates hovering at pre-Asian financial crisis lows of 2.5 per cent may be gone, but there is some optimism that present high levels will not be sustained for too long. Goldman Sachs economist Dick Li says: 'It certainly will not go down to 2.5 per cent, but a big part of the current unemployment problem is cyclical, so it will go down again to 4 to 5 per cent after recovery.' Job contraction has been most marked in the construction and retail sectors. The Hong Kong economy is not expected to recover until the end of next year, when Goldman estimates the economy will grow by an above-consensus 5.5 per cent for the year. Economists differ on the impact on unemployment of mainland emigration, which is dominated by low-skill workers. Citibank senior economist Joe Lo says: 'I don't think immigration is a big problem. It is mostly that the economy is not growing fast enough to absorb the labour supply. Even if we had no immigration, [unemployment] would still have gone up in the past few years because of the economic downturn.' Economist Corporate Network regional economist Connie Bolland disagrees. 'I think we have a lot of people coming across the border, and I think Hong Kong should be attracting more skilled labour, to open up to more high-quality workers to help Hong Kong move towards a high value-added economy and create more demand for our services. 'This [labour force] adjustment is slowly coming back to the Asian economies but as we are seeing patchy recovery in the United States, we will see a gradual improvement. But the improvement will be slow.' Standard Chartered Bank global markets economist Tai Hui says Hong Kong's record high unemployment problem was caused by both structural and cyclical factors. 'I think that the decline of unemployment will be slower than the rise,' he says. Mr Hui is concerned at the weakened link between a recovering export sector and a languishing domestic sector, as many trade services have migrated to the mainland. However, he has faith in the Government's plan to enhance the export services sector to restore this link. 'If Hong Kong can re-invent itself, it would not surprise me if we had long-term economic growth of 5 to 6 per cent,' Mr Hui says. Citibank senior economist Joe Lo says structural unemployment will rise in the future if the Government does not institute reforms in areas such as education and social security. But his main argument is that the rise in the unemployment rate is 'largely cyclical because of the economy.' Morgan Stanley economist Denise Yam Wing-yan says unemployment continues to rise after an economic rebound because unemployment is usually a lagging indicator. 'Joblessness peaked one full year, in September 1999, after the last cyclical trough, in the third quarter of 1998,' Ms Yam says. Structural issues lingered, as Hong Kong's high-cost base forced restructuring toward higher value-added logistics service industries and the hollowing out of unskilled sectors.